LIFO
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define the LIFO inventory valuation method
➛ Explain how LIFO works under inventory systems
➛ Calculate Cost of Goods Sold using LIFO
➛ Calculate Ending Inventory using LIFO
➛ Understand the effect of LIFO on profit
➛ Analyze LIFO’s impact on financial statements
➛ Identify limitations and usage of LIFO
Key Vocabulary
➛ LIFO | Last In, First Out
➛ Inventory Valuation
➛ Cost of Goods Sold
➛ Ending Inventory
➛ Inflation
➛ Gross Profit
➛ LIFO Reserve
What Is LIFO?
LIFO assumes that
➛ The most recent inventory purchased is sold first
➛ The oldest inventory remains in ending inventory
LIFO is an accounting assumption and does not usually reflect physical flow.
Why Businesses Use LIFO
LIFO is used because it
➛ Matches current costs with current revenues
➛ Results in higher COGS during inflation
➛ Produces lower taxable income
➛ Helps businesses reduce tax payments
Common LIFO users
➛ Manufacturing companies
➛ Oil & gas companies
➛ Large wholesalers
How LIFO Works - Step by Step
Example Inventory Purchases
Date
Jan 1
Jan 10
Jan 20
Jan 1
Jan 10
Jan 20
Units
100
200
150
100
200
150
Cost per Unit
$10
$12
$14
$10
$12
$14
Units Sold - 250
Step 1 - Apply LIFO Order
Units sold come from most recent purchases first
150 units @ $14
100 units @ $12
Step 2 - Calculate COGS | LIFO
150 × $14 = $2,100
100 × $12 = $1,200
COGS = $3,300
Step 3 - Calculate Ending Inventory
Remaining inventory
100 units @ $10
100 units @ $12
Ending Inventory = $2,200
Impact of LIFO on Financial Statements
Income Statement
➛ Higher COGS | during inflation
➛ Lower gross profit
➛ Lower taxable income
Balance Sheet
➛ Inventory valued at older costs
➛ Lower current assets
Limitations of LIFO
➛ Ending inventory may be outdated
➛ Not allowed under IFRS
➛ Makes financial comparison difficult
➛ Can distort inventory values over time
FIFO vs LIFO | Quick Comparison
Feature
Inventory sold first
COGS | inflation
Profit
Inventory Value
IFRS allowed
Inventory sold first
COGS | inflation
Profit
Inventory Value
IFRS allowed
FIFO
Oldest
Lower
Higher
Higher
Yes
Oldest
Lower
Higher
Higher
Yes
LIFO
Newest
Higher
Lower
Lower
No
Newest
Higher
Lower
Lower
No
LIFO Concept Check
Answer True or False
➛ LIFO assumes newest inventory is sold first
➛ LIFO results in lower profit during inflation
➛ LIFO is allowed under IFRS
➛ LIFO matches current costs with current revenue
Fill in the Blanks
1. LIFO stands for Last ____, First ____
2. Under LIFO, the ______ inventory remains in ending inventory
3. LIFO results in ______ COGS during inflation
LIFO Calculation Practice
Inventory purchases
60 units @ $5
80 units @ $6
Units sold
100
Tasks
Calculate COGS using LIFO
Calculate Ending Inventory
Critical Thinking
Explain in 3-4 sentences
➛ Why some businesses prefer LIFO for tax purposes
➛ One disadvantage of LIFO in financial reporting
Mini Case Study
A manufacturing company operates in a high-inflation economy and wants to reduce taxable income while matching current costs to revenue.
Questions
➛ Which inventory valuation method should it use?
➛ How does this method affect COGS?
➛ Why is profit lower under this method during inflation?
➛ Why might this method not be allowed in some countries?
Quick Quiz
➛ What does LIFO stand for?
➛ Which inventory is sold first under LIFO?
➛ How does LIFO affect COGS during inflation?
➛ Is LIFO allowed under IFRS?
➛ Name one disadvantage of LIFO.
Answers ➧ Here
FIFO vs LIFO Comparison ➧ Here